State-run insurer of last resort bears much of coastal cost

By Mary Williams Walsh
© 2008 The New York Times,
Reproduced under license from
the Copyright Clearance Center

Hurricane Ike caused as much as $16 billion in property damage, by some estimates, but the state-led insurance pool that will pay much of the cost has only $2.3 billion, leaving the Texas government on the hook potentially for billions of dollars in claims.

Insurance companies all but stopped offering hurricane coverage for property on the Gulf Coast after Hurricanes Katrina and Rita in 2005 cost them billions of dollars in claims and as property values soared, raising their exposure to disaster claims.

The pullout of commercial insurance carriers forced most property owners on the coast to turn to the state-run insurer of last resort, the Texas Windstorm Insurance Association, or the wind pool, as it is called.

Tens of thousands of owners of homes and businesses have bought storm coverage through the state insurance pool in the last few years. It now has about 225,000 policyholders, up from about 68,000 in 2001. Property in the hurricane risk zone was worth about $895 billion in 2007, an increase of 24 percent since 2004, according to the Insurance Information Institute.

Fiscal watchdogs in Texas, which has had budget surpluses, have been warning for some time that the insurance pool’s exposure was growing much faster than its finances, and that a major adjustment had to be made before a disaster like Hurricane Katrina wiped out the fund. Measures in the Legislature failed because lawmakers could not agree on how much of the cost should be borne by people with homes and businesses on the coast.

Now a significant storm has hit, forcing the issue.

“It’s clear now that the Legislature is going to have to do something, because it’s no longer a hypothetical,” said Jim Oliver, chief executive of the Windstorm Insurance Association, a private company chartered by the state. “This could happen again next week, for crying out loud.”

Although Hurricane Ike did not send a 20-foot surge of water up the Houston Ship Channel, which some officials thought was possible, it did batter big hotels, high-rise condominiums and other residences and businesses on Galveston Island and along the coast.

Because the insurance industry had pulled out of the coastal market, an estimated 60 percent of the insurance cost in Galveston will be borne by the insurance pool.

But insurance companies did not pull out of the Houston area, other than a small slice along the water, so the insurance pool faces less exposure there. Just how much the insurance pool will have to pay will depend on how much of the hurricane damage is concentrated on the coast.

Risk Management Solutions, a company in Newark, Calif., that estimates the effects of disasters, is predicting that the cost of Hurricane Ike’s damage from wind and the storm surge will be $6 billion to $16 billion. That estimate does not include the cost of inland flooding, a type of damage not covered by conventional insurance policies.

Insurance companies are not completely out of the picture in Galveston and the coastal counties. All carriers licensed to sell property insurance in Texas are required to participate in the state insurance pool and pay assessments based on their market share in the rest of the state. The wind pool also has rights on a $500 million state catastrophe reserve fund and reinsurance worth $1.5 billion.

These resources, plus customer premiums, have given the state insurance pool a total of $2.3 billion to cover all of this year’s claims. But smaller storms this year have reduced the total to $2.1 billion.

When that money is depleted, the insurance pool can impose unlimited assessments on insurance companies. They, in turn, can recover the money through state tax breaks, spread over several years. The resulting decline in tax revenue could drain millions from the state’s general revenue fund.

“While it’s definitely a burden, because they’ll have to find ways of shifting the money around, it’s not a crisis,” said Oliver, the wind pool’s chief, noting that the state’s huge oil and gas industry has kept its budget flush.

Oliver is scheduled to provide estimates of the insurance payouts Wednesday in a public meeting, which will probably raise anew the questions over the wind pool’s finances that the Legislature could not answer before.

“The real rub is, who pays?” Oliver said